MERRIMACK PHARMACEUTICALS INC - Quarter Report: 2019 September (Form 10-Q)

Al cost

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2019

OR

For the transition period from            to           

Commission file number: 001-35409

Merrimack Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

(617) 441-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of November 8, 2019, there were 13,362,951 shares of Common Stock, $0.01 par value per share, outstanding.

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

PART II

OTHER INFORMATION

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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, contained in this Quarterly Report on Form 10-Q, including statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management, are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “target,” “potential,” “will,” “would,” “could,” “should,” “continue” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words.

The forward-looking statements in this Quarterly Report on Form 10-Q include, among other things, statements about:

We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this Quarterly Report on Form 10-Q, particularly in Part II, Item 1A. Risk Factors, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, collaborations or investments that we may make.

You should read this Quarterly Report on Form 10-Q and the documents that we have filed as exhibits to this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

NOTE REGARDING TRADEMARKS

ONIVYDE^® is a trademark of Ipsen S.A. Any other trademarks, trade names and service marks referred to in this Quarterly Report on Form 10-Q are the property of their respective owners.

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PART I

FINANCIAL INFORMATION

Item 1.Financial Statements.

Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Balance Sheets

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Statements of Stockholders’ Equity

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Merrimack Pharmaceuticals, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Merrimack Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1. Nature of the Business

Merrimack Pharmaceuticals, Inc. (the “Company”) is a biopharmaceutical company based in Cambridge, Massachusetts that is entitled to receive up to $455.0 million in contingent milestone payments related to its sale of ONIVYDE^® to Ipsen S.A. (“Ipsen”) in April 2017. The Company does not have any ongoing research or development activities and is seeking potential acquirers for its remaining preclinical and clinical assets. The Company does not have any employees and instead uses external consultants for the operation of the Company.

On April 3, 2017, the Company completed the sale to Ipsen (the “Ipsen Sale”) of ONIVYDE and MM-436. In connection with the Ipsen Sale, the Company is eligible to receive up to $450.0 million in additional regulatory approval-based milestone payments. The Company is also eligible to receive a remaining $5.0 million milestone payment that may become payable for the ex-U.S. development and commercialization of ONIVYDE pursuant to a license and collaboration agreement (the “Servier Agreement”) between Ipsen and Les Laboratoires Servier SAS (“Servier”) (as assignee from Shire plc). The Company entered into the Servier Agreement in 2014, and on April 3, 2017, the Servier Agreement was assigned to Ipsen in connection with the completion of the Ipsen Sale. To date, the Company has received $28.0 million of the potential $33.0 million in milestone payments under the Servier Agreement.

The remaining up to $455.0 million in potential milestone payments resulting from the Ipsen Sale consist of:

On May 30, 2019, the Company announced the completion of its review of strategic alternatives, following which the Company’s board of directors implemented a series of measures designed to extend the Company’s cash runway and preserve its ability to capture the potential milestone payments resulting from the Ipsen Sale. In connection with that announcement, the Company discontinued the discovery efforts on its remaining preclinical programs: MM-401, an agonistic antibody targeting a novel immuno-oncology target, TNFR2; and MM-201, a highly stabilized agonist-Fc fusion protein targeting death receptors 4 and 5. The Company is seeking potential acquirers for its remaining preclinical and clinical assets.

The Company’s termination of its executive management team and all other employees was substantially completed by June 28, 2019 and fully completed by July 12, 2019. As of July 12, 2019, the Company does not have any employees. The Company has engaged external consultants to run the day-to-day operations of the Company. The Company has also entered into consulting agreements with certain former members of its executive management team who are supporting the Company’s relationship with current partners, assisting with the potential sale of remaining preclinical and clinical assets, and assisting with certain legal matters and the continued wind-down of operations.

In May 2019, the Company monetized certain assets to strengthen its cash position. This includes the sale of its entire equity position in Silver Creek Pharmaceuticals, Inc. (“Silver Creek”), resulting in $7.8 million in cash, and the sale of laboratory equipment from its research and development operations, resulting in approximately $1.4 million in cash.

On April 15, 2019, the Company repaid in full all principal, accrued and unpaid interest, fees, costs and expenses under its Loan and Security Agreement (the “Loan Agreement”) with Hercules Capital, Inc. (“Hercules”) in an aggregate amount equal to $16.0 million.

On July 12, 2019, the Company completed the sale to 14ner Oncology, Inc. (“14ner”) (the “14ner Sale”) of its anti-HER3 antibody programs, MM-121 (seribantumab) and MM-111. In connection with the 14ner Sale, the Company received an upfront cash payment of $3.5 million in connection with the completion of the 14ner Sale. The Company is also eligible to receive up to $54.5 million in additional potential development, regulatory approval and commercial-based milestone payments, consisting of:

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The Company is subject to risks and uncertainties common to companies in the biopharmaceutical industry, including, among other things, its ability to secure additional capital to fund operations, development by competitors of new technological innovations, protection of proprietary technology and compliance with government regulations. None of the Company’s product candidates are approved for any indication by the FDA or any other regulatory agency. The Company operates in an environment of rapid change in technology and substantial competition from pharmaceutical and biotechnology companies, among others. In addition, the Company is dependent upon the services of its external consultants for the operation of the Company. The Company’s business strategy depends substantially upon its ability to receive future milestone payments from Ipsen and Servier. Any failure to achieve such milestones or a perception that the milestones may not be achieved will materially and adversely affect the Company and the value of its common stock.

In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. As of September 30, 2019, the Company had an accumulated deficit of $543.9 million. During the nine months ended September 30, 2019, the Company incurred a net loss of $20.6 million and used $28.7 million of cash in operating activities. The Company expects to continue to generate operating losses in the foreseeable future. Based on current projections, the Company believes that existing cash, and cash equivalents of $20.9 million as of September 30, 2019 will allow the Company to continue its operations into 2027, when the Company estimates the longest-term potential Ipsen milestone may be achieved. The continued viability of the Company beyond that point is dependent on its ability to raise additional capital to finance its operations or to reduce operating expenses. There can be no assurance that the Company will be able to obtain sufficient capital to cover its costs on acceptable terms, if at all.

The Company expects that it would finance any future cash needs through a combination of divestitures of its product candidates or other assets, equity offerings and debt financings. There can be no assurance as to the timing, terms or consummation of any divestiture or financing, and the terms of any such financing may adversely affect the holdings or the rights of the Company’s stockholders or require the Company to relinquish rights to certain of its revenue streams or product candidates.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements reflect the operations of Merrimack Pharmaceuticals, Inc. and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated.

The condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The accounting policies followed in the preparation of the interim condensed consolidated financial statements are consistent in all material respects with those presented in Note 1 to the financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Consolidation

The accompanying condensed consolidated financial statements reflect Merrimack Pharmaceuticals, Inc. and its wholly owned subsidiaries.

Unaudited Interim Financial Information

The condensed consolidated balance sheet as of December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by GAAP. The condensed consolidated balance sheet as of September 30, 2019, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2019 and 2018, the condensed consolidated statements of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and the condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 are unaudited. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30, 2019, the results of its operations for the three and nine

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months ended September 30, 2019 and 2018, its statements of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and its statements of cash flows for the nine months ended September 30, 2019 and 2018. The financial data and other information disclosed in the notes related to the three and nine months ended September 30, 2019 and 2018 are unaudited. The results for the three and nine months ended September 30, 2019 and 2018 are not necessarily indicative of results to be expected for the year ending December 31, 2019, any other interim periods, or any future year or period.

The unaudited interim financial statements of the Company included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from this report, as is permitted by such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 6, 2019.

Condensed Consolidated Statements of Cash Flows

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of financial position that sum to the total of the same such amounts shown in the statement of cash flows:

Restricted cash on the statement of financial position for 2018 primarily represents amounts pledged as collateral for operating lease obligations as contractually required.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting periods. Significant estimates, assumptions and judgments reflected in these condensed consolidated financial statements include, but are not limited to, the accrual of research and development expenses and the valuation of stock-based awards. Estimates are periodically reviewed in light of changes in circumstances, facts and experience. Actual results could differ from the Company’s estimates.

3. Leases

The Company adopted the new leasing standards on January 1, 2019, using the modified retrospective transition method, which does not require restatement of prior periods, for all the leases existing as of the adoption date. The adoption of the new leasing standards did not have a significant impact on the Company’s consolidated financial statements. As of January 1, 2019, the Company’s only existing lease was the lease of its principal research and office space located at One Kendall Square in Cambridge, Massachusetts, which expired in June 2019.

4. Fair Value of Financial Instruments

Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is determined based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect certain market assumptions. As a basis for considering such assumptions, GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used to develop the assumptions and for measuring fair value as follows: Level 1 observable inputs such as quoted prices in active markets for identical assets; Level 2 inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3 unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value.

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The following tables show assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:

During the nine months ended September 30, 2019 and the year ended December 31, 2018, there were no transfers between Level 1 and Level 2. The fair value of Level 2 instruments classified as cash equivalents and marketable debt securities were determined through third-party pricing services.

The Company’s cash, restricted cash, prepaid expenses and other current assets, accounts payable and accrued expenses are recorded at cost, which approximates fair value due to their short-term nature.

5. Marketable Securities and Cash Equivalents

The following table summarizes the Company’s marketable securities and cash equivalents as of September 30, 2019 and December 31, 2018:

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6. Notes Payable

Through April 15, 2019, the Company borrowed $15.0 million under the Loan Agreement by and among the Company, certain subsidiaries of the Company from time to time party thereto, the several banks and other financial institutions or entities from time to time parties thereto (collectively referred to as “Lender”) and Hercules, in its capacity as administrative agent and collateral agent for itself and Lender, and incurred $0.4 million of related debt discount and issuance costs, inclusive of the $0.3 million fee paid upon closing. Prior to the repayment of the debt, the debt discount and issuance costs were being accreted to the principal amount of debt and being amortized from the date of issuance through August 1, 2021 to interest expense using the effective-interest method.  

On April 15, 2019, the Company repaid in full all principal, accrued and unpaid interest, fees, costs and expenses under the Loan Agreement in an aggregate amount equal to $16.0 million (the “Payoff Amount”). The Payoff Amount includes a prepayment penalty of $0.2 million and a fee of $0.8 million, which were recorded to interest expense. The loss on extinguishment of the debt of approximately $1.0 million was recorded as interest expense during the second quarter of 2019. The loss on extinguishment represents the difference between the reacquisition price of the debt and the net carrying amount of the extinguished debt.  In connection with the payment of the Payoff Amount, all liens and security interests granted to secure the obligations under the Loan Agreement and all guaranties of the obligations under the Loan Agreement terminated.  

No interest expense was associated with the Loan Agreement for the three months ended September 30, 2019. During the nine months ended September 30, 2019, the Company recognized $1.5 million of interest expense related to the Loan Agreement. No interest expense was associated with the Loan Agreement for the three and nine months ended September 30, 2018.

7. Accounts Payable, Accrued Expenses and Other

Accounts payable, accrued expenses and other as of September 30, 2019 and December 31, 2018 consisted of the following:

8. Stock-Based Compensation

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) is administered by the Company’s Board of Directors and permits the Company to grant incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.

The Company’s board of directors authorized and declared a special cash dividend of $20.0 million to holders of the Company's common stock, which was payable on September 5, 2019 to stockholders of record as of the close of business on August 28, 2019. The board of directors determined, in accordance with the adjustment provision of the 2011 Plan, that the special cash dividend was unusual and non-recurring and that appropriate adjustment to the stock options to purchase shares of the Company’s common stock outstanding under the 2011 Plan was required. The Company treated this adjustment as a modification to the original stock option grant because the terms of the agreements were modified in order to preserve the value of the option awards after a large non-recurring cash dividend. These options were amended to decrease the exercise price and increase the shares subject to the stock option. However, as the fair value of the underlying stock decreased more than the exercise price upon modification, and the result was a decrease in the fair value of such options. Accordingly, no incremental value was provided and no additional compensation cost was recorded by the Company.

At September 30, 2019, there were 1.2 million shares remaining available for grant under the 2011 Plan. The weighted-average grant date fair value per share of stock options granted during the three and nine months ended September 30, 2019 was $3.53. The weighted-average grant date fair value per share of stock options granted during the nine months ended September 30, 2018.

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The fair value of stock options granted to employees during the nine months ended September 30, 2019 and 2018 was estimated at the date of grant using the following assumptions:

The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2019 and 2018 as follows:

9. Net Loss Per Common Share

Basic net loss per share is calculated by dividing the net loss attributable to Merrimack Pharmaceuticals, Inc. by the weighted-average number of common shares outstanding during the period.

Diluted net loss per share is computed by dividing the net loss attributable to Merrimack Pharmaceuticals, Inc. by the weighted-average number of dilutive common shares outstanding during the period. Dilutive shares outstanding is calculated by adding to the weighted shares outstanding any potential (unissued) shares of common stock from outstanding stock options based on the treasury stock method. In a period when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods where a loss is reported, there is no difference in basic and dilutive loss per share.

The Company follows the two-class method when computing net loss per share when it has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participating rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based on their respective rights to receive dividends, as if all income for the period has been distributed or losses to be allocated if they are contractually required to fund losses. There were no amounts allocated to participating securities for the three and nine months ended September 30, 2019 and 2018, as the Company was in a loss position and had no shares that met the definition of participating securities outstanding as of September 30, 2019 and 2018.

Stock options are excluded from the calculation of diluted loss per share because the net loss for the three and nine months ended September 30, 2018 causes such securities to be anti-dilutive. Outstanding options excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2019 and 2018 are shown in the chart below:

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10. Restructuring Activities

On November 7, 2018, the Company announced that it was implementing a reduction in headcount as part of a corporate restructuring. The corporate restructuring followed a comprehensive review of the Company’s product candidate pipeline. Under this corporate restructuring, the Company recognized total restructuring expenses of $1.3 million for the year ended December 31, 2018 consisting of one-time employee termination benefits of $1.0 million recorded in research and development expense and $0.3 million recorded in general and administrative expense. These one-time employee termination benefits are comprised of severance, benefits and related costs, all of which are expected to result in cash expenditures. Approximately $0.4 million of these payments were made during the fourth quarter of 2018, and the accrued remaining payments at December 31, 2018 were approximately $0.9 million.    

During the three months ended September 30, 2019, the Company reversed restructuring expenses of $0.1 million, consisting of one-time employee termination benefits of $0.1 million recorded in general and administrative expense. During the nine months ended September 30, 2019, the Company recognized additional restructuring expenses of $4.8 million, consisting of one-time employee termination benefits of $2.0 million recorded in research and development expense and $2.8 million recorded in general and administrative expense. These one-time employee termination benefits are comprised of severance, benefits and related costs, all of which are expected to result in cash expenditures. During the three and nine months ended September 30, 2019, the Company paid approximately $0.8 million and $5.6 million of these restructuring expenses, respectively.

As a result of the restructuring announced on January 8, 2017, the Company paid $0.2 million and $0.6 million, respectively, in restructuring expense for the three and nine months ended September 30, 2018. There were no restructuring expenses for the three and nine months ended September 30, 2018.  

As of July 12, 2019, the Company has no employees.

The following table summarizes the charges related to the restructuring activities as of September 30, 2019:

11. Investment in Silver Creek

On August 20, 2010, the Company acquired a controlling financial interest in Silver Creek. At such time, the Company had the ability to direct the activities of Silver Creek that most significantly impacted Silver Creek’s economic performance through its ownership percentage and through the board of director seats controlled by the Company. As such, the Company consolidated Silver Creek in its financial statements. Since the Company acquired its financial interest, Silver Creek has raised funding through the issuance of preferred stock and convertible promissory notes. The Company has not participated in any Silver Creek financings nor has it provided any funding.

During the third quarter of 2017, Silver Creek completed its Series C preferred stock financing, reducing the Company’s ownership percentage in Silver Creek below 50% and resulting in the Company no longer controlling the Silver Creek board of directors. Accordingly, the Company determined that it was no longer the primary beneficiary of Silver Creek and deconsolidated Silver Creek from its financial statements on July 13, 2017. Starting on July 14, 2017, the Company accounted for its investment in Silver Creek under the equity method of accounting since the Company had the ability to exercise significant influence over Silver Creek. Under the equity method of accounting, the Company has recorded its proportionate share of Silver Creek’s losses in its results of operations with a corresponding decrease in the carrying value of the investment.

As of May 7, 2019, the carrying value of the Company’s investment in Silver Creek was $6.4 million. On May 7, 2019, the Company sold its entire equity position in Silver Creek for $7.8 million. Accordingly, a $1.4 million of gain on sale of its equity investment was recognized during the nine months ended September 30, 2019 within other (expense) income, net in the condensed consolidated statement of operations and comprehensive loss.

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12. 14ner Sales Transaction

On July 12, 2019, the Company completed the 14ner Sale. In connection with the 14ner Sale, the Company received an upfront cash payment of $3.5 million and recognized in gain on sale of assets during the three and nine months ended September 30, 2019. The Company is also eligible to receive up to $54.5 million in additional potential development, regulatory approval and commercial-based milestone payments, consisting of:

13. Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which establishes principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing and uncertainty of cash flows arising from a lease. The most notable change will be lessees recognizing an asset and liability on their balance sheet for operating leases. In 2018, the FASB issued ASU 2018-01 and ASU 2018-11, which collectively add two practical expedients, provide a second modified retrospective transition method which does not require retrospective adjustment of prior periods, and provide certain narrow scope improvements to the new lease guidance. ASU 2016-02 and the amending ASU’s are effective for the Company for annual periods beginning after December 15, 2018 and interim periods therein, with early adoption permitted. The Company adopted the new guidance as of January 1, 2019 using the modified retrospective transition method, which does not require restatement of prior periods, for all leases existing as of the adoption date. As described in Note 3, “Leases,” the adoption of this new guidance did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which represents a new credit loss standard that will change the impairment model for most financial assets and certain other financial instruments. Specifically, this guidance will require entities to utilize a new “expected loss” model as it relates to trade and other receivables. In addition, entities will be required to recognize an allowance for estimated credit losses on available-for-sale debt securities, regardless of the length of time that a security has been in an unrealized loss position. This guidance will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the potential impact that the adoption of this guidance may have on the condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). This standard eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of its disclosure framework project. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods and early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance may have on its condensed consolidated financial statements.

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies that the Company adopts as of the specified effective date. Unless otherwise discussed above, the Company does not believe that the adoption of recently issued standards has or may have a material impact on the Company’s condensed consolidated financial statements or disclosures.

14. Subsequent Events

In accordance with ASC 855-10 the Company has analyzed its operations subsequent to September 30, 2019 to the date these financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2018 included in our Annual Report on Form 10-K. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth in Part II, Item 1A. Risk Factors of this Quarterly Report on Form 10-Q, which are incorporated herein by reference, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a biopharmaceutical company based in Cambridge, Massachusetts that is entitled to receive up to $455.0 million in contingent milestone payments related to our sale of ONIVYDE^® to Ipsen S.A., or Ipsen, in April 2017 and up to $54.5 million in contingent milestone payments related to our sale of MM-121 and MM-111 to 14ner Oncology, Inc., or 14ner, in July 2019. We do not have any ongoing research or development activities and are seeking potential acquirers for our remaining preclinical and clinical assets. We do not have any employees and instead use external consultants for the operation of our company.

On April 3, 2017, we completed the sale to Ipsen, the Ipsen sale of ONIVYDE and MM-436, or the commercial business. In connection with the Ipsen sale, we are eligible to receive up to $450.0 million in additional regulatory approval-based milestone payments. We are also eligible to receive a remaining $5.0 million milestone payment that may become payable for the ex-U.S. development and commercialization of ONIVYDE pursuant to a license and collaboration agreement, or the Servier agreement, between Ipsen and Les Laboratoires Servier SAS, or Servier (as assignee from Shire plc). We entered into the Servier agreement in 2014, and on April 3, 2017, the Servier agreement was assigned to Ipsen in connection with the completion of the Ipsen sale. To date, we have received $28.0 million of the potential $33.0 million in milestone payments under the Servier agreement.

The remaining up to $455.0 million in potential milestone payments resulting from the Ipsen sale consist of:

On May 30, 2019, we announced the completion of our review of strategic alternatives, following which our board of directors implemented a series of measures designed to extend our cash runway into 2027 and preserve our ability to capture the potential milestone payments resulting from the Ipsen sale. We have based this estimate on assumptions that may prove to be wrong, and we could use our financial resources sooner than we currently expect. In connection with that announcement, we discontinued the discovery efforts on our remaining preclinical programs: MM-401, an agonistic antibody targeting a novel immuno-oncology target, TNFR2; and MM-201, a highly stabilized agonist-Fc fusion protein targeting death receptors 4 and 5. We are seeking potential acquirers for our remaining preclinical and clinical assets.

The termination of our executive management team and all other employees was substantially completed by June 28, 2019 and fully completed by July 12, 2019. As of July 12, 2019, we do not have any employees. We have engaged external consultants to run our day-to-day operations. We have also entered into consulting agreements with certain former members of our executive management team who are supporting our relationship with current partners, assisting with the potential sale of remaining preclinical and clinical assets, and assisting with certain legal matters and the continued wind-down of operations.

In May 2019, we monetized certain assets to strengthen our cash position. This included the sale of our entire equity position in Silver Creek Pharmaceuticals, Inc., or Silver Creek, resulting in $7.8 million in cash, and the sale of laboratory equipment from our research and development operations, resulting in approximately $1.4 million in cash.

On April 15, 2019, we repaid in full all principal, accrued and unpaid interest, fees, costs and expenses under our Loan and Security Agreement, or loan agreement, with Hercules Capital, Inc., or Hercules, in an aggregate amount equal to $16.0 million.

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On July 12, 2019, we completed the sale to 14ner, or the 14ner sale, of our anti-HER3 antibody programs, MM-121 (seribantumab) and MM-111. In connection with the 14ner sale, we received an upfront cash payment of $3.5 million and are eligible to receive up to $54.5 million in additional potential development, regulatory approval and commercial-based milestone payments, consisting of:

On July 25, 2019, our board of directors announced, authorized and declared a special cash dividend of $20.0 million to holders of our common stock. The special dividend was payable on September 5, 2019 to stockholders of record as of the close of business on August 28, 2019. The special dividend resulted in a decrease to additional paid-in capital.

We previously devoted substantially all of our resources to our drug discovery and development efforts, including conducting clinical trials for our product candidates, protecting our intellectual property and providing general and administrative support for these operations. We have financed our operations primarily through private placements of convertible preferred stock, collaborations, public offerings of our securities, secured debt financings, sales of ONIVYDE and the Ipsen sale.

As of September 30, 2019, we had unrestricted cash and cash equivalents of $20.9 million. We expect that our cash and cash equivalents as of September 30, 2019 will be sufficient to continue our operations into 2027, when we estimate the longest-term potential Ipsen milestone may be achieved.

We have never been profitable and, as of September 30, 2019, we had an accumulated deficit of $543.9 million. Our net loss was $20.6 million and $31.6 million for the nine months ended September 30, 2019 and 2018, respectively. We do not expect to have any research and development expenses going forward.

Financial Operations Overview

Research and development expenses

Research and development expenses consisted of costs associated with our preclinical research activities, conduct of clinical trials, manufacturing development efforts and activities related to regulatory filings. Our research and development expenses consisted of:

We expensed research and development costs as incurred. As a result of completing the closeout of our SHERLOC, SHERBOC and MM-310 clinical trials, the discontinuation of the discovery efforts for our remaining preclinical programs, MM-401 and MM-201, and the termination of all remaining employees as of July 12, 2019, we no longer have any ongoing research or development activities. Accordingly, no research and development costs were recognized in the third quarter of 2019 and we do not anticipate incurring any such costs in future periods.

We have historically used our employee and infrastructure resources across multiple research and development programs. We tracked expenses related to our most advanced product candidates on a per project basis. Accordingly, we allocated internal employee-related and infrastructure costs, as well as third-party costs, to each of these programs. We do not allocate to specific development programs either stock-based compensation expense or expenses related to preclinical programs. Costs that were not directly attributable to specific clinical programs, such as wages related to shared laboratory services, travel and employee training and development, are not allocated and are considered general research and discovery expenses.

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The following table summarizes our principal product development programs, including the research and development expenses allocated to each clinical product candidate, for the three and nine months ended September 30, 2019 and 2018:

During the second quarter of 2019 we ceased all research and development activities related to all of our programs listed above and are actively pursuing the sale of any of our remaining program assets.

MM-121 (seribantumab)

In February 2015, we initiated the global, open-label, biomarker-selected, Phase 2 randomized SHERLOC clinical trial evaluating MM-121 in combination with docetaxel, versus docetaxel alone, in patients with heregulin positive non-small cell lung cancer. On October 19, 2018, we announced the termination of the SHERLOC clinical trial based on an interim analysis triggered by the occurrence of 75% of events required for trial completion, which demonstrated that the addition of MM-121 to docetaxel did not improve progression free survival over docetaxel alone in this patient population.

In February 2018, we dosed the first patient in our global, double-blinded, placebo-controlled, biomarker-selected Phase 2 randomized SHERBOC clinical trial evaluating MM-121 in combination with fulvestrant, versus fulvestrant alone, in patients with heregulin positive, hormone receptor positive, ErbB2 (HER2) negative, metastatic breast cancer. On November 7, 2018, we announced that we were discontinuing development of all ongoing MM-121 programs, including terminating the SHERBOC clinical trial based on the results of the interim analysis of the SHERLOC clinical trial. The costs for MM-121 were expensed as incurred, as we believed the costs to maintain the intellectual property for MM-121 increased the likelihood of selling or out-licensing the program.

On July 12, 2019, we completed the 14ner sale of our anti-HER3 antibody programs, MM-121 (seribantumab) and MM-111.

MM-310

In March 2017, we initiated a Phase 1 clinical trial of MM-310 to evaluate its safety and preliminary activity in patients with solid tumors and to identify the maximum tolerated dose. On November 7, 2018, we announced an amendment to the clinical trial to extend the dosing interval of MM-310 from every three weeks to every four weeks as a result of emerging cumulative grade 3 peripheral neuropathy following multiple cycles of treatment observed in three patients. On April 4, 2019, we announced that we were discontinuing development of MM-310 as a result of a comprehensive review of available safety data from the Phase 1 clinical trial. Based on emerging data since the amendment of the clinical protocol in late 2018, we concluded that the trial would not be able to reach an optimal therapeutic index for MM-310. The MM-310 program was discontinued and we do not expect to incur any future costs related to MM-310.

Legacy Programs

In January 2017, we announced the completion of a strategic pipeline review as a result of which many product candidates in our pipeline were put on hold until such time as we determine the conditions are appropriate to invest in them. These molecules include MM-302, MM-151, MM-131 and certain early stage discovery efforts.

In June 2018, we announced top-line results from the global, double-blinded, placebo-controlled, Phase 2 randomized CARRIE clinical trial of MM-141, showing that the trial did not meet its primary or secondary efficacy endpoints in patients who received MM-141 in combination with nab-paclitaxel and gemcitabine, compared to nab-paclitaxel and gemcitabine alone. Based on these results, we are not devoting additional resources to and have ceased all of our development activities for MM-141.

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General and administrative expenses

General and administrative expenses consist primarily of salaries and other related costs for personnel, including stock-based compensation expenses and benefits, in our legal, intellectual property, business development, finance, information technology, corporate communications, investor relations and human resources departments. Other general and administrative expenses include costs for employee training and development, board of directors costs, depreciation, insurance expenses, facility-related costs not otherwise included in research and development expenses, legal and professional fees, and accounting and information technology services fees.

Restructuring expenses

As a result of the corporate restructuring activities we announced on November 7, 2018, April 30, 2019 and May 30, 2019, we recognized total restructuring expenses of $4.8 million for the nine months ended September 30, 2019, related to one-time employee termination benefits comprised of severance, benefits and related costs, all of which are expected to result in cash expenditures.   Approximately $0.8 million and $5.6 million in payments were made during the three and nine months ended September 30, 2019, respectively. The remaining $0.1 million as of September 30, 2019 is expected to be paid in the fourth quarter of 2019 and first quarter of 2020.

As a result of the restructuring we announced on January 8, 2017, we paid $0.2 million and $0.6 million in restructuring expense for the three and nine months ended September 30, 2018, respectively. There were no restructuring expenses for the three and nine months ended September 30, 2018.  

Interest income

Interest income consists primarily of interest income associated with our marketable securities.

Interest expense

Interest expense for the three and nine months ended September 30, 2019 and 2018 consisted primarily of cash and non-cash interest related to the loan agreement with Hercules that we entered into on July 2, 2018 as well as the loss we recorded on the extinguishment of the loan agreement in the second quarter of 2019.

Other (expense) income, net

Other (expense) income, net consists primarily of our proportionate share of losses from our equity method investment in Silver Creek as well as the gain we recorded upon the sale of the investment in the second quarter of 2019.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which we have prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, and generally accepted accounting principles in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported expenses during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies and the methodologies and assumptions we apply under them have not materially changed since March 6, 2019, the date we filed our Annual Report on Form 10-K for the year ended December 31, 2018. For more information on our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2018.

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Results of Operations

Comparison of the three months ended September 30, 2019 and 2018

Research and development expenses

We have ceased all research and development activities and no research and development expenses were recognized for the three months ended September 30, 2019 compared to $13.0 million for the three months ended September 30, 2018, a decrease of $13.0 million, or 100.0%. We do not expect to incur any research and development cost in future periods.

General and administrative expenses

General and administrative expenses were $4.3 million for the three months ended September 30, 2019 compared to $3.8 million for the three months ended September 30, 2018, an increase of $0.5 million, or 13.2%. This increase was primarily attributable to legal and other professional fees resulting from the contested proxy process with respect to our 2019 annual meeting of stockholders. We expect general and administrative costs to decrease in future periods as we look to sell our remaining preclinical and clinical assets and continue to streamline our operations.

Gain on sales of assets

Gain on sales of assets was $3.5 million for the three months ended September 30, 2019, was attributable to the sale of our anti-HER3 antibody programs, MM-121 (seribantumab) and MM-111 to 14ner in July 2019.

Interest income

Interest income was $0.1 million for the three months ended September 30, 2019 compared to $0.3 million for the three months ended September 30, 2018, primarily attributable to the interest income associated with our marketable securities and interest bearing cash and cash equivalents accounts.

Interest expense

We did not recognize interest expense for the three months ended September 30, 2019. Interest expense was $0.5 million for the three months ended September 30, 2018, primarily attributable to the loan with Hercules which was repaid in April 2019.  We do not expect to incur interest expense in the future.

Other (expense) income, net

Other (expense) income, net was less than $0.1 million of income for the three months ended September 30, 2019 compared to $0.2 million of expense for the three months ended September 30, 2018. The income of less than $0.1 million for the three months ended September 30, 2019 represents net foreign exchange gains. The $0.2 million of expense for the three months ended September 30, 2018, was primarily attributable to our proportionate share of losses from our equity method investment in Silver Creek.

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Comparison of the nine months ended September 30, 2019 and 2018

Research and development expenses

Research and development expenses were $11.1 million for the nine months ended September 30, 2019 compared to $39.7 million for the nine months ended September 30, 2018, a decrease of $28.6 million, or 72.1%. This decrease was primarily attributable to:

General and administrative expenses

General and administrative expenses were $14.0 million for the nine months ended September 30, 2019 compared to $11.6 million for the nine months ended September 30, 2018, an increase of $2.4 million, or 20.7%. This increase was primarily attributable to the timing of corporate expenses, legal professional expenses, additional cost incurred associated with the filing of our preliminary and definitive proxy statements for our 2019 annual meeting of stockholders and recognition of restructuring expenses related to the November 7, 2018, April 30, 2019 and May 30, 2019 restructuring announcements.

Gain on sales of assets

Gain on sales of assets was $4.9 million for the nine months ended September 30, 2019, primarily attributable to the sale of our anti-HER3 antibody programs, MM-121 (seribantumab) and MM-111 to 14ner for $3.5 million and sales of our laboratory equipment and office furniture of $1.4 million.

Interest income

Interest income was $0.7 million for the nine months ended September 30, 2019 compared to $0.9 million for the nine months ended September 30, 2018, primarily attributable to the interest income associated with our marketable securities and interest bearing cash and cash equivalents accounts.

Interest expense

Interest expense was $1.5 million for the nine months ended September 30, 2019, which primarily represents the $1.0 million loss on extinguishment we recorded upon repayment of the loan agreement with Hercules. Interest expense was $0.5 million for the nine months ended September 30, 2018, primarily attributable to the loan with Hercules which was paid in full in April 2019.

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Other (expense) income, net

Other (expense) income, net was $0.4 million of income for the nine months ended September 30, 2019 compared to $1.8 million of expense for the nine months ended September 30, 2018. The income of $0.4 million for the nine months ended September 30, 2019 represents the $1.4 million gain we recorded on the sale of our equity method investment in Silver Creek offset by our proportionate share of Silver Creek’s losses which we recorded prior to the sale of our investment. The $1.8 million of expense for the nine months ended September 30, 2018, was primarily attributable to our proportionate share of losses from our equity method investment in Silver Creek.

Liquidity and Capital Resources

Sources of liquidity

We have financed our operations through September 30, 2019 primarily through private placements of convertible preferred stock, collaborations, public offerings of our securities, secured debt financings, sales of ONIVYDE and the Ipsen sale. Through September 30, 2019, we have received $580.7 million from the Ipsen sale, $268.2 million from the sale of convertible preferred stock and warrants, $126.7 million of net proceeds from the sale of common stock in our initial public offering and a July 2013 follow-on public offering, $38.6 million of net proceeds from our 2015 “at the market offering” program, $39.6 million of net proceeds from a secured debt financing, $120.6 million of net proceeds from the issuance of the convertible notes in our July 2013 public offering, $168.5 million of net proceeds from the issuance of the 2022 notes, $492.5 million of upfront license fees, milestone payments, reimbursement of research and development costs and manufacturing services and other payments from our collaborations, $68.9 million of cash receipts related to ONIVYDE sales, and $28.0 million in milestone payments related to the development and commercialization of ONIVYDE. As of September 30, 2019, we had unrestricted cash and cash equivalents of $20.9 million.

On April 15, 2019, we repaid in full all principal, accrued and unpaid interest, fees, costs and expenses under the loan agreement with Hercules in an aggregate amount equal to $16.0 million. We had previously borrowed $15.0 million under the loan agreement. See Note 6, “Notes Payable,” in the accompanying notes to the condensed consolidated financial statements.

On July 25, 2019, our board of directors announced, authorized and declared a special cash dividend of $20.0 million on our common stock. The special dividend was paid on September 5, 2019 to stockholders of record as of the close of business on August 28, 2019.

Cash flows

The following table provides information regarding our cash flows for the nine months ended September 30, 2019 and 2018:

Operating activities

Cash used in operating activities of $28.7 million during the nine months ended September 30, 2019 was primarily a result of our $20.6 million net loss from operations and a net decrease in assets and liabilities of $7.1 million. The net decrease in operating assets and liabilities during the nine months ended September 30, 2019 was primarily driven by decreases in accounts payable, accrued expenses and other and an increase to prepaid expenses and other assets. This decrease was offset by non-cash items, including $2.2 million in depreciation, $1.8 million of stock-based compensation expense and $1.0 million of loss on extinguishment of debt and amortization, offset by $3.5 million gain on sale of in progress research and development asset, $2.0 million gain on disposal of fixed assets and $0.4 million in gain on equity method investment. Cash used in operating activities of $46.7 million during the nine months ended September 30, 2018 was primarily a result of our $47.9 million net loss from operations and a net decrease in assets and liabilities of $0.6 million. The net decrease in operating assets and liabilities during the nine months ended September 30, 2018 was primarily driven by increases in accounts payable, accrued expenses and other and income taxes payable offset by decreases to prepaid expenses and other current assets and deferred rent. This decrease was offset by non-cash items, including $4.8 million benefit from intraperiod tax allocation, $3.2 million in depreciation and amortization, $2.3 million of stock-based compensation expense, $1.7 million in loss on equity method investment and $0.5 million non-cash activity related to discontinued operations.

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Investing activities

Cash provided by investing activities of $64.8 million during the nine months ended September 30, 2019 was primarily due to proceeds from maturities and sales of marketable securities totaling $51.5 million, proceeds from sale of equity method investment totaling $7.8 million, proceeds on sale of in progress research and development asset totaling $3.5 million and proceeds on sale of equipment totaling $2.0 million. Cash used in investing activities of $11.8 million during the nine months ended September 30, 2018 was primarily due to purchases of marketable securities totaling $76.9 million offset by proceeds from maturities and sales of marketable securities totaling $42.2 million and milestone payments relating to the sale of the commercial business totaling $23.0 million. 

Financing activities

Cash used in financing activities of $35.9 million during the nine months ended September 30, 2019 was primarily due to the cash dividend paid of $20.0 million and repayment of debt of $15.0 million and payment of debt extinguishment costs of approximately $1.0 million. Cash provided by financing activities of $14.6 million during the nine months ended September 30, 2018 was due to proceeds from our loan agreement with Hercules.

Funding requirements

We have incurred significant expenses and operating losses to date. On May 30, 2019, we announced the completion of our review of strategic alternatives, following which our board of directors implemented a series of measures designed to extend our cash runway into 2027 and preserve our ability to capture the potential milestone payments resulting from the Ipsen sale. In connection with that announcement, we discontinued the discovery efforts on our remaining preclinical programs and implemented a reduction in headcount resulting in the termination of all remaining employees as of July 12, 2019. Our future capital requirements will depend on many factors, including:

We expect that we would finance any future cash needs through a combination of divestitures of our product candidates or other assets, equity offerings and debt financings. There can be no assurance as to the timing, terms or consummation of any divestiture or financing. We do not have any committed external sources of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through arrangements with third parties, we may have to relinquish valuable rights to our future revenue streams or product candidates.

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Contractual Obligations and Commitments

On April 15, 2019, we repaid in full all principal, accrued and unpaid interest, fees, costs and expenses under the loan agreement with Hercules in an aggregate amount equal to $16.0 million. We had previously borrowed $15.0 million under the loan agreement. See Note 6, “Notes Payable,” in the accompanying notes to the condensed consolidated financial statements.

Other than the above, there were no material changes to our contractual obligations and commitments described under Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on March 6, 2019.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under SEC rules.

Recent Accounting Pronouncements

See Note 13, “Recent Accounting Pronouncements,” in the accompanying notes to the condensed consolidated financial statements for a full description of recent accounting pronouncements.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

We invest in a variety of financial instruments, principally cash deposits, money market funds, securities issued by the U.S. government and its agencies and corporate debt securities. The goals of our investment policy are preservation of capital, fulfillment of liquidity needs and fiduciary control of cash and investments. We also seek to maximize income from our investments without assuming significant risk.

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of interest rates. Due to the short-term duration of our investment portfolio and the low risk profile of our investments, an immediate 10% change in interest rates would not have a material effect on the fair market value of our portfolio. We have the ability and intention to hold our investments until maturity, and therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our investment portfolio.

We do not currently have any auction rate or mortgage-backed securities. We do not believe our cash and cash equivalents have significant risk of default or illiquidity, however we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our Principal Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

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Changes in Internal Control Over Financial Reporting

On May 30, 2019, we announced the completion of our review of strategic alternatives, following which our board of directors implemented a series of measures designed to extend our cash runway for several years and preserve our ability to capture the potential milestone payments resulting from the Ipsen sale. In connection with the implementation of these measures, we commenced efforts to terminate our executive management team and all other employees, which was fully completed by July 12, 2019.  We do not have any employees. We have engaged external consultants to run our day-to-day operations. We have also entered into consulting agreements with certain former members of our executive management team to assist with this transition.

In connection with the transition of the management of the day-to-day operations of the Company to external consultants, we migrated our enterprise resource planning system to a less complex accounting system.  Due to the termination of all employees, we have also significantly modified our internal control procedures over financial reporting to reflect the reduction in transaction volume and reliance on external consultants to manage the day-to-day operations of the Company. In connection with these significant changes to the business and the control environment, we have updated our risk assessment of internal controls over financial reporting.  During the quarter ended September 30, 2019, we have taken steps to redesign and implement internal controls over the cash disbursements process and the accounting closing and reporting processes.  While we believe the controls are effectively designed to provide reasonable assurance on the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP, we are still in the process of designing internal controls over information technology general controls, the review of the financial statements and related account reconciliations.

Other than the above, no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1A.Risk Factors.

The following risk factors and other information included in this Quarterly Report on Form 10-Q should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. Please see page 1 of this Quarterly Report on Form 10-Q for a discussion of some of the forward-looking statements that are qualified by these risk factors. If any of the following risks occur, our business, financial condition and results of operations could be materially and adversely affected.

Risks Related to Our Business Strategy

Our business strategy depends substantially upon our ability to receive future contingent milestone payments.

Our business strategy depends substantially upon our ability to receive future milestone payments from Ipsen, Servier and 14ner. On May 30, 2019, we announced the completion of our review of strategic alternatives, following which our board of directors implemented a series of measures designed to extend our cash runway into 2027 and preserve our ability to capture the potential milestone payments resulting from the Ipsen sale. We are entitled to receive up to $455.0 million in contingent milestone payments related to our sale of ONIVYDE to Ipsen and up to $54.5 million in contingent milestone payments related to our sale of MM-121 and MM-111 to 14ner. We do not have any ongoing research or development activities. Any failure to achieve such milestones or a perception that the milestones may not be achieved will materially and adversely affect the company and the value of the common stock.

Even if some or all of the milestones set forth in the Ipsen sale agreement, Servier agreement and 14ner agreement are achieved, it may take significantly longer than we anticipate and could require us to raise additional funding in order to maintain our ability to receive payment for such milestones.